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Labor markets and institutions

Institutions have important consequences for the performance of households, companies, governments, and entire markets—they determine the welfare of nations. Contributions to this subject area explore the underlying mechanisms and the politico-economic determinants of such structures. Many provide background analyses that offer evidence on how new institutions and policies would affect labor markets.

The world’s second largest economy has boomed,
but a rapidly aging labor force presents substantial challenges

China experienced significant economic progress
over the past few decades with an annual average GDP growth of approximately
10%. Population expansion has certainly been a contributing factor, but that
is now changing as China rapidly ages. Rural migrants are set to play a key
role in compensating for future labor shortages, but inequality is a major
issue. Evidence shows that rural migrants have low-paying and undesirable
jobs in urban labor markets, which points to inefficient labor allocation
and discrimination that may continue to impede rural–urban migration.

There is no evidence that increases in the
minimum wage have hurt immigrants

According to economic theory, a minimum wage
reduces the number of low-wage jobs and increases the number of available
workers, allowing greater hiring selectivity. More competition for a smaller
number of low-wage jobs will disadvantage immigrants if employers perceive
them as less skilled than native-born workers—and vice versa. Studies
indicate that a higher minimum wage does not hurt immigrants, but there is
no consensus on whether immigrants benefit at the expense of natives.
Studies also reach disparate conclusions on whether higher minimum wages
attract or repel immigrants.

Appropriate timing and targeting of activation
programs for the unemployed can help improve their cost-effectiveness

Activation programs, such as job search
assistance, training, or work experience programs for unemployed workers,
typically initially produce negative employment effects. These so-called
“lock-in effects” occur because participants spend less time and effort on
job search activities than non-participants. Lock-in effects need to be
offset by sufficiently large post-participation employment or earnings for
the programs to be cost-effective. They represent key indirect costs that
are often more important than direct program costs. The right timing and
targeting of these programs can improve their cost-effectiveness by reducing
lock-in effects.

Trade policy is not an employment policy and
should not be expected to have major effects on overall employment

Trade regulation can create jobs in the sectors
it protects or promotes, but almost always at the expense of destroying a
roughly equivalent number elsewhere in the economy. At a product-specific or
micro level and in the short term, controlling trade could reduce the
offending imports and save jobs, but for the economy as a whole and in the
long term, this position has neither theoretical support nor empirical
evidence in its favor. Given that protection may have other—usually
adverse—effects, understanding the difficulties in using it to manage
employment is important for economic policy.

Successful policies for helping the unemployed need to
confront the adverse effects of unemployment on feelings of life satisfaction

Many studies document a large negative effect of
unemployment on happiness. Recent research has looked into factors related to impacts on
happiness, such as adaptation, social work norms, social capital, religious beliefs, and
psychological resources. Getting unemployed people back to work can do more for their
happiness than compensating them for doing nothing. But not all unemployed people are
equally unhappy. Understanding the differences holds the key to designing effective
policies, for helping the unemployed back into work, and for more evenly distributing
the burden of unemployment resulting from economic restructuring.

There is evidence that better performing firms
tend to enter international markets. Internationally active firms are
larger, more productive, and pay higher wages than other firms in the same
industry. Positive performance effects of engaging in international activity
are found especially in firms from less advanced economies that interact
with partners from more advanced economies. Lowering barriers to the
international division of labor should be part of any pro-growth policy.

Should statistical criteria for measuring employment and
unemployment be re-examined?

Measuring employment and unemployment is essential for economic
policy. Internationally agreed measures (e.g. headcount employment and unemployment rates
based on standard definitions) enhance comparability across time and space, but changes in
real labor markets and policy agendas challenge these traditional conventions. Boundaries
between different labor market states are blurred, complicating identification. Individual
experiences in each state may vary considerably, highlighting the importance of how each
employed or unemployed person is weighted in statistical indices.

Technological unemployment is not
inevitable—some innovation creates jobs, and some job destruction can be
avoided

Studies find that technological change has
contributed to the decline in manufacturing and to persistent unemployment
in many advanced economies. While process innovation can be job-destroying,
product innovation can imply the emergence of new firms, new sectors, and
thus new jobs. But even for process innovation, the final impact on labor
demand is shaped by market mechanisms that can compensate for the direct
job-destroying impact if market and institutional rigidities do not impede
them. Policies should maximize the job-creation effect of product innovation
and minimize the direct labor-saving impact of process innovation.

Extending provisions of collective contracts to all
workers in an industry or region may lead to employment losses

In many countries, the minimum wages and working
conditions set in collective bargaining contracts negotiated by a limited set of
employers and unions are subsequently extended to all the employees in an industry.
Those extensions ensure common working conditions within the industry, limit wage
inequality, and reduce gender wage gaps. However, several studies suggest that those
benefits come at the cost of reduced employment levels, especially during recessions.
The income losses of workers who are displaced because of a collective contract
extension can offset the wage gains among workers who keep their jobs.